Break even point in business is the point on which the production costs and covered by your sales. So, you’re standing on a no profit, no loss point. Whenever a project is started, its first goal is to reach the break even point. After this point, even bit of money your business makes is counted as pure profit.
That’s why you should know the importance of knowing your break even point in the business. This keeps on changing with time as your business grows and your keep adding more products.
Rules to Calculating Break Even Point
The formula can only be applied to one product. It also assumes that fixed and variable costs and constant. You have to keep the sales prices constant at all levels. Also, total production equals total sales.
Here are some of the most significant benefits of using the break even point formula.
- It helps you in calculating costs and profits at various levels of production and sales.
- Before changing the process of some products, you can actually forecast the impact that price change would have on your profits in the long run.
- It can also help in calculation of relationship between fixed and variable costs.
- You can also forecast the effect of an efficiency change in your production process. This will let you know how the profits would fluctuate over time.
Here are some cons of break even point analysis.
- It requires the sales prices to be constant at all the outputs. It isn’t realistic.
- It also says that production and sales is same all the times. This is also not possible.
- A break even chart can take a lot of time to develop.
- It can only be applied to one product at a time. Which wastes a lot of your time.